If the coalition wins the Federal Election it will be one hell of a buying opportunity for those miners directly in the eye of MRRT – a diluted version of the super profits tax (RSPT) originally proposed within the government-commissioned Henry Report.

If Sports Bet is any proxy, the Labor government looks like the odds-on favourite to win what will be a close election outcome.

But assuming the Liberal party does form a coalition government on 21 August and MRRT is dropped as promised, Andrew Pedler of Wilson HTM notes that DCF valuations of those stocks directly impacted by the proposed MRRT will rise by 0.3 to 20 percent.

Most resource stocks are already buys, says Pedler, but a change of government at the next election could represent one hell of a buying opportunity.

“Investors looking for stocks likely to fare best from a reversal of the MRRT back to the status quo should look for high-margin, low cash-cost iron ore and coal plays,” says Pedler.

Tim Schroeders fund manager with Pengana Capital also expects the sub-sectors directly impacted by MRRT to receive an immediate share price kicker. “Assuming the prospect of a Liberal-led coalition election victory increases, I would expect to see more aggressive investors start to position themselves accordingly,” says Schroeders.

But the difficulty will be analysing the impact of MRRT’s removal and other macro-economic factors. Beyond MRRT considerations, he says the other concern for resources is further softening of commodity prices following a potential slowing in China’s production forecasts.

Schroeders wouldn’t normally recommend investors make buying decisions based on tax alone. But he does expect iron ore and coal plays – the primary targets of an MRRT tax regime – to be swiftly re-rated on the back of what would be an improved profitability outlook.

Roger Leaning, head of research at RBS Morgans agrees that miners will be quickly re-rated if the Liberals win. He notes that prior to the announcement of the RSPT on 2 May, BHP and RIO were trading 15 and 19 percent higher – $45 and $80 respectively. He says that share prices for these stocks have fallen by up to twice as much as he expected, based on a projected 5 to 18 per cent MRRT impact on NPV.

But with so many other markets forces currently in play, he doesn’t expect share prices to swiftly return to their April highs if the Libs win. “Assuming the MRRT is off the table, the market is likely to refocus on the downward pressure confronting China production, and many investors may remain sidelined until these fears are allayed,” says Leaning.

The high margin, low cash-cost miners that Leaning expects to benefit the most from a scrapping of MRRT include: Rio Tinto (RIO), Fortescue Metals Group (FMG), BHP Billiton (BHP), Macarthur Coal (MCC), and New Hope Corp (NHC).

“From a risk/return and leverage perspective, Fortescue Metals and New Hope are the best ways to play a pure iron ore and pure coal thematics respectively. Eastern Star (ESG) is our favoured coal seam gas stock due to better leverage,” says Leaning. “But if you’re going to buy one stock to ride any upside it would be BHP.”

While any miner producing iron ore can expect to be re-rated following a scrapping of MRRT, Andrew Muir resources analyst with Hartleys says the ‘purer the play’, the greater the upside should be. He expects a Liberal-led coalition election victory to favour Atlas Iron (AAGO) which would be harshly penalised for its low capex concept under the proposed tax changes.

He expects a removal of anomalies inherent within MRRT, like the tax treatment on magnetite projects – which have higher operating costs and require significant extra upfront investment – to allay investor fears for key players in this space. Standout stocks in this group are Gindalbie Metals (GBG), Murchison Metals (MMX) and Atlas Iron (AGO).

David Flanagan managing director of Atlas Iron, which also has exposure to magnetite, estimates that his company would pay more tax under MRRT than under a state-based royalties regime. If the MRRT was scrapped, Muir says the Atlas share price could be re-rated by as much as 20 percent. He says while the share price could receive an initial 5-10 percent jump, a decision to put the sale of its Ridley magnetite iron ore project back on the table could add as much upside again.

According to John Young, senior resources analyst with Wilson HTM, the entire coal seam gas (CSG) sector will benefit from a Liberal victory. Labor government announcements on 2 July effectively extended the Petroleum Rent Resources Tax (PRRT) to cover all onshore Australia, gas and coal seam methane gas projects (including the North West Shelf project).

Based on Young’s numbers, a Liberal-led coalition government decision not to replace the current royalty regime with the PRRT could restore the NPV on CSG producers by between 15 to 20 percent.

“For those CSG stocks closer to commercialisation, like Arrow (AOE), Bow Energy (BOW) and Eastern Star Gas (ESG) the benefit could be more immediate,” says Young. “And while stocks still in stgelopment phase like Apollo Gas (AZO) and Comet Ridge (COI) will be less affected, they’re also likely to benefit from renewed positive sentiment towards the sector at large.”

For more diversified stocks like Santos (STO), Origin Energy (ORG) or AWE (AWE) where there’s relatively minimal overall exposure, share price changes will be minimal.

“The decision by a Liberal-led coalition to revoke all proposed tax changes would be a net positive for the sector at large,” says Young. “But there’s no guarantee the brunt of the PRRT, already factored into share prices will immediately reverse out.”

Other articles in this week’s newsletter

Miners Set To Soar If The Libs Win

18 Share Tips – 26 July 2010

Is This Stock A Rip off? How To Use The P/E Ratio

Oil Stocks Undervalued

10 Worst First-Time Homebuyer Mistakes

Should You Invest Your Entire Portfolio In Stocks? 

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